Cocoa Sourcing - University of St.Gallen

 
Cocoa Sourcing - University of St.Gallen
Master’s Thesis

                          Cocoa Sourcing
    Sustainability Challenges and Emerging Corporate Response

Author
Manuela Wettstein
Master in International Affairs & Governance

Supervisor
Prof. Dr. Thomas Dyllick
Professor of Sustainability Management
Institute for Economy and the Environment (IWÖ-HSG)
Cocoa Sourcing                                                                Manuela Wettstein

    ABSTRACT
The chocolate industry is confronted with serious sustainability challenges in cocoa production
that may put long term cocoa supply at risk. Although sustainability challenges have been a
concern for the industry for some years, the challenges have become more complex and
increasingly urgent. Hence, it is analysed how chocolate manufacturers started to address the
challenges. Additionally, the influence of these emerging corporate responses on global cocoa
sourcing and on the sustainability challenges is assessed. The comprehensive review of the
emerging corporate responses of six Switzerland-based companies shows that the responses
represent similar approaches towards sustainable cocoa sourcing. The assessment of the
influence on global cocoa sourcing reveals major effects on the cocoa procurement market.
About the effect of the emerging corporate responses on the sustainability challenges in cocoa
production no conclusive statement can be made because of the incomplete data basis. Overall,
the chocolate companies see themselves as being in transition to sustainable cocoa sourcing.

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Cocoa Sourcing                                                                                                          Manuela Wettstein

      TABLE OF CONTENTS

Abstract ...................................................................................................................................... I
List of Figures ......................................................................................................................... III
List of Abbreviations .............................................................................................................. IV
1. Introduction .......................................................................................................................... 1
2. Research Approach .............................................................................................................. 3
   2.1 Analytical Framework ...................................................................................................... 5
   2.2 Explorative Study Design ................................................................................................. 7
3. Global Cocoa Sourcing ........................................................................................................ 8
   3.1 Processing and Manufacturing Chain............................................................................... 9
   3.2 Upstream Supply Chain.................................................................................................. 11
   3.3 Cocoa Procurement Market ............................................................................................ 16
   3.4 Industry Stakeholders ..................................................................................................... 18
4. Sustainability Challenges in Cocoa Production............................................................... 22
   4.1 Corporate Sustainability ................................................................................................. 22
   4.2 Sustainability Challenges ............................................................................................... 26
5. Emerging Corporate Responses ........................................................................................ 30
   5.1 Barry Callebaut............................................................................................................... 32
   5.2 Chocolat Frey ................................................................................................................. 34
   5.3 Chocolats Halba ............................................................................................................. 36
   5.4 Lindt & Sprüngli ............................................................................................................ 38
   5.5 Mondelēz ........................................................................................................................ 40
   5.6 Nestlé .............................................................................................................................. 42
6. Influence of the Emerging Corporate Responses ............................................................ 43
   6.1 Influence on Global Cocoa Sourcing ............................................................................. 45
      6.1.1 Upstream Supply Chain ......................................................................................... 45
      6.1.2 Cocoa Procurement Market ................................................................................... 46
   6.2 Influence on Sustainability Challenges in Cocoa Production ........................................ 50
7. Conclusion ........................................................................................................................... 54
Appendix ................................................................................................................................. 58
List of Interview Partners ...................................................................................................... 61
List of Literature .................................................................................................................... 62
List of Internet Sources.......................................................................................................... 65

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Cocoa Sourcing                                                                                              Manuela Wettstein

     LIST OF FIGURES

Figure 1: Degrees of Supply Chain Complexity ........................................................................ 4
Figure 2: Processing and Manufacturing Chain ....................................................................... 10
Figure 3: Supply Chain Map .................................................................................................... 12
Figure 4: Development of the Cocoa Bean Price ..................................................................... 17
Figure 5: Business Sustainability Typology............................................................................. 24
Figure 6: Overview Sustainability Challenges in Cocoa Production ....................................... 26
Figure 7: Suitability of Cocoa Production. For Current and Future (2050) Conditions. ......... 29
Figure 8: Basic Logic Model .................................................................................................... 50

                                                               III
Cocoa Sourcing                                               Manuela Wettstein

    LIST OF ABBREVIATIONS

ADM              Archer Daniels Midland
CEN              European Committee for Standardisation
COCOBOD          Ghana Cocoa Board
CSR              Corporate Social Responsibility
CSV              Creating Shared Value
FLA              Fair Labor Association
FT               Fairtrade International
GAP              Good Agricultural Practices
GRI              Global Reporting Initiative
ICCO             International Cocoa Organization
IPCC             Intergovernmental Panel on Climate Change
KPI              Key Performance Indicator
LBCs             Licenced Buying Companies
MNC              Multinational Corporation
NCP              Nestlé Cocoa Plan
NGOs             Non-Governmental-Organisations
PPM              Purchasing Portfolio Model
QPP              Quality Partner Program
RA               Rainforest Alliance
SCM              Supply Chain Management
TBL              Triple Bottom Line
WCF              World Cocoa Foundation

                                          IV
Cocoa Sourcing                                                                  Manuela Wettstein

    1. INTRODUCTION
Chocolate is one of the world’s favourite foods. On a normal day, one billion people around the
globe eat chocolate (KPMG, 2014, p. 6). In Switzerland, each citizen consumes on average
12kg of chocolate per year. Therewith the Swiss hold the world record in chocolate
consumption (KPMG, 2014, p. 3). In general, the global market for chocolate is dominated by
Western Europe and North America. However, emerging markets such as China, India, Brazil
and Russia are increasingly driving growth in the chocolate industry (Wexler & Mukherji,
2014). Due to rising disposable incomes, chocolate has become an affordable treat for the
evolving middle class in these countries. The revenues of the global chocolate industry are
estimated at US$ 117 billion in 2014 (KPMG, 2014, p. 3).

The basic ingredients of chocolate are cocoa, sugar and powdered milk in the case of milk
chocolate (Chocosuisse, 2001, p. 30). In 2013/14 world production of cocoa was at 4.104
million tonnes. A considerable growth since 1971/72 when cocoa production was at 1.6 million
tonnes (International Cocoa Organization [ICCO], 2014a). Cocoa is produced by about six
million smallholders in Africa, Latin America and South East Asia (UNCTAD, 2008, p. 16).
West Africa alone is responsible for around 70% of global cocoa supply. The largest producing
country is Côte d’Ivoire with around 30-40% of global production, followed by Ghana with
around 20%. Indonesia, Cameroon and Nigeria are other major producing countries (Gilbert,
2008, pp. 23-24). While global demand for chocolate is predicted to continue growing, the
supply of cocoa is less certain and might plateau or possibly decline (World Cocoa Foundation
[WCF], 2015c, p. 3). Chocolate manufacturers, including Mars and Barry Callebaut, have
warned of a one million tonne supply deficit by 2020 if production is not increased (Terazono,
2014). Considering the total production of around four million tonnes, such a deficit would be
substantial. However, the International Cocoa Organization (ICCO) relativizes the forecast. The
ICCO states that although projections show that supply deficits are likely to occur during the
next several years, the industry’s stocks of cocoa beans should cushion the development before
production growth accelerates again (ICCO, 2014b). Whereas the actual size of the deficit is
contested, it is widely acknowledged that the six million cocoa farmers face significant
challenges. Among numerous others, major challenges are low incomes, child labour, poor
education, lack of basic infrastructure, and climate change. The various issues result in poverty
in farming communities as well as in low cocoa productivity (Goodyear, 2014). It can be stated
that the cocoa industry faces complex economic, social and environmental challenges in cocoa
production. In other words, the industry is confronted with sustainability challenges that
possibly lead to a decline of cocoa supply. As a consequence, the sustainability challenges in
cocoa production may put long term cocoa supply and thus the entire industry at risk.

For a long time, sustainability challenges in cocoa production have been neglected. However,
at the turn of the millennium, two distinct threats triggered reactions by the chocolate

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Cocoa Sourcing                                                                    Manuela Wettstein

manufacturers. First, the industry realized the presence of significant risks in the cocoa supply
chain due to severe political turmoil in Côte d’Ivoire. Second, the industry became the target of
global campaigns by non-governmental-organisations (NGOs), labour unions and the media
pointing to child labour and child trafficking in cocoa production (Bitzer et al., 2012, p. 357).
In this regard, chocolate manufacturers were subsequently compelled to sign the so-called
Harkin-Engel Protocol in 2001. The protocol was developed by U.S. Senator Tom Harking and
U.S. Representative Eliot Engel in order to eliminate the worst forms of child labour and adult
forced labour on cocoa farms in Côte d’Ivoire and Ghana (Nagle, 2008, p. 141). As a
consequence of the protocol, the International Cocoa Initiative was created. The International
Cocoa Initiative is a multi-stakeholder initiatives that works towards the elimination of child
labour in cocoa producing countries (International Cocoa Initiative, 2014). Although the
companies have not fully completed any of the six articles delineated in the Harking-Engel
Protocol, the protocol can be considered a milestone. Today, the presence of child labour on
cocoa farms is widely admitted and companies support sensitisation efforts in the producing
countries. Besides, the governments of Ghana and Côte d’Ivoire established specialized
agencies and developed national action plans to address the issue in various economic sectors
(Payson Center, 2011, p. 7). Overall, significant investments in cocoa sustainability initiatives
were made in recent years (WCF, 2015c, p. 3). The ICCO estimates that around 65 initiatives
involving around 60 organisations are addressing various sustainability challenges in cocoa
production (ICCO, 2012a). However, in 2012, the ICCO concluded that despite the proliferation
of sustainability initiatives not much, if anything, has changed in the producing countries.
Consequently, the ICCO demanded that efforts are integrated around a common vision (ICCO,
2012a). At the first World Cocoa Conference in 2012, cocoa industry stakeholders including
governments, producers, processors, exporters, traders, chocolate manufacturers and civil
society signed the Abidjan Cocoa Declaration. Although the declaration is not a legally binding
framework, it outlines a course of action towards a more sustainable cocoa economy (KPMG,
2014, p. 18). In 2014, at the second World Cocoa Conference in Amsterdam, the stakeholders
reaffirmed the Abidjan Declaration and identified priority areas for further improvements
(ICCO, 2014c). Also in 2014, the World Cocoa Foundation (WCF) announced the industry-led
sustainability initiative CocoaAction. CocoaAction aims at boosting productivity and
strengthening cocoa community development (WCF, 2014b, p. 1).

Although sustainability challenges have been a concern for the industry for some years now,
the challenges are becoming broader, more complex and increasingly urgent (KPMG, 2014, p.
16). Against this background, having a closer look at the sustainability efforts in the industry is
indicated. In particular, analysing how chocolate companies started to address the sustainability
challenges in cocoa production is of particular interest. Assessing the influence of these
sustainability efforts on the challenges in cocoa production is essential. Furthermore, it is
interesting to analyse if these efforts cause changes in global cocoa sourcing. Consequently, the
overall guiding research question is as follows:

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Cocoa Sourcing                                                                   Manuela Wettstein

       What is the influence of the emerging corporate responses on global cocoa
       sourcing and to what extent are they an effective answer to the sustainability
       challenges in cocoa production?

This research question implicitly entails the assumption that the sustainability efforts are a
reaction to the sustainability challenges. However, this is not necessarily the case since the
sustainability efforts might be triggered by other reasons. Hence, the motivations of the
chocolate companies are also explored. To answer the research question, the initial situation in
global cocoa sourcing is delineated first. Conventional global sourcing refers to the
predominant approach of chocolate companies in consuming countries to source cocoa from
cocoa smallholders in producing countries. Afterwards, the sustainability challenges are
described in more detail. For that, the framework of corporate sustainability is introduced.
Subsequently, a comprehensive review of the existing corporate responses is provided. Then,
the influence of the emerging corporate responses on global cocoa sourcing and on the
sustainability challenges in cocoa production is examined. Finally, a conclusion is drawn.

Regarding producing countries, the analysis focuses on countries in West Africa due to the fact
that this region produces approximately 70% of global cocoa supply. In particular, the focus
lies on the two largest producing countries Côte d’Ivoire and Ghana. Moreover, the
sustainability challenges in West Africa are particularly urgent. With regard to consuming
countries, the focus lies on Switzerland. The Swiss chocolate industry depends considerably on
cocoa produced in Ghana and Côte d’Ivoire (Earth Security Group, 2015, p. 20). Furthermore,
Switzerland hosts some of the global leaders in the industry. Besides, chocolate is one of
Switzerland’s most famous export products and is at the heart of the country’s international
brand.

    2. RESEARCH APPROACH
In order to assess the influence of the emerging corporate responses on global cocoa sourcing
and on the sustainability challenges, first of all, an analytical framework is elaborated.
Subsequently, the study design and the employed methodology are outlined.

Inherently, the research topic is part of the global supply chain management (SCM) field of
research. Basically, a supply chain is “a set of three or more entities (organizations or
individuals) directly involved in the upstream or downstream flows of products, services,
finances, and/or information from a source to a customer” (Mentzer et al., 2001, p. 4). While
upstream refers to the part of the supply chain from the focal firm to the raw material suppliers,
downstream describes the part from the focal firm to the end customer. There are three degrees
of supply chain complexity: basic supply chains, extended supply chains and ultimate supply
chains. A basic supply chain consists of the focal firm, its direct suppliers and its direct
customers. An extended supply chain includes the suppliers of the focal firm’s direct suppliers
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Cocoa Sourcing                                                                     Manuela Wettstein

and the customers of the focal firm’s direct customers too. An ultimate supply chain
encompasses all the organizations involved in all the upstream and downstream flows from an
ultimate supplier to an ultimate customer. Hence, the ultimate supply chain is better
characterized as a supply network (Essig et al., 2013, pp. 5-6). The three degrees of supply
chain complexity are illustrated in Figure 1. Generally, the suppliers with whom the focal firm
maintains direct contractual relationships are considered first-tier or tier-1 suppliers. The
suppliers of a tier-1 supplier are called second-tier or tier-2 suppliers – and so on. These indirect
suppliers, that is tier-2 or higher, that have no contractual relationship to the focal firm, are all
referred to as sub-suppliers (Grimm, 2013, p. 18). In consequence of the research question, the
focus of the research at hand lies on the ultimate supply chain.

                             Figure 1: Degrees of Supply Chain Complexity

                                 Adapted from: Essig et al., 2013, p. 6

Supply chains exist whether they are managed or not. SCM requires overt management efforts
that are coordinated over the respective supply chain (Mentzer et al., 2001, p. 4). SCM can be
defined as “the systemic, strategic coordination of the traditional business functions and the
tactics across these business functions within a particular company and across businesses
within the supply chain, for the purpose of improving the long-term performance of the
individual companies and the supply chain as a whole” (Mentzer et al., 2001, p. 18). From a
focal firm’s perspective, the purpose of SCM is to increase its competitive advantage (Mentzer
et al., 2001, p. 15). According to Porter (1980), competitive advantage results from the customer
value a firm creates. Basically, there are two types of competitive advantages: cost leadership
and differentiation. Within Porter’s framework, SCM can be perceived as being concerned with

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Cocoa Sourcing                                                                    Manuela Wettstein

either improving the efficiency of a supply chain or its effectiveness (Mentzer et al., 2001, p.
15). In general, there are four reference points for SCM: marketing, sourcing, operations and
logistics (Essig et al., 2013, p. 45). In consequence of the research question, sourcing is the
reference point for the research at hand. Accordingly, the analytical framework elaborated in
the following disregards the other reference points and focuses on sourcing only.

    2.1 ANALYTICAL FRAMEWORK
Sourcing has long been a neglected field of business management, despite its impact on the
company’s cost structure. However, gradually sourcing has become an important strategic
business function in the sense of supply management (Essig et al., 2013, p. 97). Sourcing can
be defined as the sum of activities that supply a firm with goods, services, equipment, rights
and information from external sources (Gabler Wirtschaftslexikon, 2015). A sourcing strategy
is the combination and optimisation of different sub-strategies that concern the number of
suppliers, the complexity of the input factors, areal aspects, acquisition time and the location of
value creation (Essig et al., 2013, pp. 108-110). A useful framework for identifying the
appropriate sourcing strategy is Kraljic’s (1983) purchasing portfolio model (PPM). The PPM
has gained high levels of acceptance from both managers and academics and is still applied in
practice and used as reference point in research (Dubois & Pedersen, 2002, p. 35). Kraljic’s
(1983) model distinguishes between different sourcing situations and offers concrete
recommendations for action. According to the PPM, a company’s sourcing strategy depends on
two factors: the importance of the item that needs to be purchased in terms of profit impact and
the complexity of the supply market in terms of supply risk (Kraljic, 1983, p. 110). Accordingly,
there are four categories of items: strategic (high profit impact, high supply risk), bottleneck
(low profit impact, high supply risk), leverage (high profit impact, low supply risk) and
noncritical (low profit impact, low supply risk). Each category requires a distinctive sourcing
approach (Kraljic, 1983, p. 112). Strategic items should be sourced from a few suppliers with
whom the focal firm has close, trusting and long-term relationships. The relevant measure is
total cost, not price. With bottleneck items the risk should be mitigated and transaction costs
should be limited by contracting and stockpiling. Leverage items are generally homogenous
commodities for which there are multiple potential suppliers. Thus, leverage items should be
sourced mainly on price. Similarly, noncritical items should be purchased in a transaction-based
manner and based on price (Pagell et al., 2010, p. 59). Additionally, the relative strength of
both, the focal firm and the suppliers, needs to be taken into account. Where the focal firm plays
a dominant role, a reasonably aggressive exploit-strategy is recommended. If the suppliers are
strong, the focal firm should assume a defensive diversifying-strategy. If neither is the case, the
focal company should pursue a balanced-strategy (Kraljic, 1983, pp. 113-114). Basically,
Kraljic’s (1983) model states that in this way the company’s limited resources are optimised
and thus the company’s profitability is increased (Pagell et al., 2010, p. 59). Although the PPM
provides valuable insights for identifying appropriate sourcing strategies, it concentrates on the

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Cocoa Sourcing                                                                    Manuela Wettstein

dyadic relationship between a focal firm and its direct suppliers only. Kraljic’s (1983) model
does not consider sub-suppliers and thus does not cover sourcing strategies beyond the basic
supply chain. Also, the PPM is not able to explain why companies engage with sub-suppliers.
Since the focus of the research at hand lies on the relation between focal firms and their ultimate
suppliers, the PPM in its original form is not directly applicable and needs to be complemented.

Frameworks that cover the ultimate supply chain are sparse (Tachizawa & Wong, 2014, p. 644).
Although trends towards outsourcing and global sourcing have created long, complex and
fragmented multi-tier supply chains, key constructs used to analyse such supply chains are
based on the dyadic logic. Even when analysing a series of dyads, links among the dyads are
not taken into account (Mena et al., 2013, pp. 58-59). Hence, what happens within the complex
network of ultimate supply chains is still underexplored (Mena et al., 2013, p. 58). Tachizawa
and Wong (2014, pp. 651-656) recently developed a framework that provides an explanation
why companies engage with their sub-suppliers. Additionally, Tachizawa and Wong (2014)
identified four basic approaches how firms manage their sub-suppliers. In principle,
sustainability is one of the main motivations for firms to engage in multi-tier practices (Mena
et al., 2013, p. 72). Besides traditional supply chain risks such as quality issues, unpredictable
delivery times or supply disruptions, social and environmental issues have become important
aspects in global SCM in recent years (Brammer et al., 2011, p. 8). Often, the most serious
sustainability issues in the supply chain are generated by sub-suppliers located far upstream.
Multinational corporations (MNC) are increasingly held accountable for actions of their sub-
suppliers. That is why many MNCs are finding new ways to manage their supply chains in
order to reduce such supply chain liabilities (Tachizawa & Wong, 2014, p. 643). Basically,
there are four different approaches how firms manage their multi-tier supply chains. The first
approach is the so-called “direct” approach. With a direct approach, focal firms have direct
access to sub-suppliers. Firms may by-pass their tier-1 suppliers and establish direct contacts to
sub-suppliers in order to monitor, govern and collaborate with them. Contacts may be formal,
informal or occur on an ad hoc basis. The second approach is the “indirect” approach where
focal firms use their power over tier-1 suppliers to make them monitor or collaborate with sub-
suppliers. Standards are a major mechanism to coordinate sub-suppliers and reduce information
asymmetry as well as transaction costs. Third, there is the “work with third parties” approach.
With this approach, focal firms collaborate with or delegate responsibilities to other
organisations such as NGOs, governments or certification bodies. Another option is to build
coalitions with competitors or other industry members in order to implement industry self-
regulation. Lastly, firms can also follow the “don’t bother” approach. Following this approach,
firms focus on tier-1 suppliers only and have neither information about sub-suppliers nor the
intention to influence them. This approach is mostly found with firms that have limited power
in the supply chain or do not face intense pressure from stakeholders. The four approaches are
complementary since a firm may simultaneously rely on more than one approach (Tachizawa
& Wong, 2014, p. 656). By providing insights into how firms engage in multi-tier supply chain

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Cocoa Sourcing                                                                  Manuela Wettstein

management and considering the relation between focal firms and their sub-suppliers,
Tachizawa and Wong’s (2014) framework is a valuable complement to Kraljic’s (1983) PPM.
Each framework sheds light on different aspects of global cocoa souring thereby contributing
individually to the overall understanding of global cocoa souring.

    2.2 EXPLORATIVE STUDY DESIGN
To the best of the author’s knowledge, the influence of corporate responses on global cocoa
sourcing and on the sustainability challenges in cocoa production has not been academically
analysed yet. Hence, the research method has to be selected appropriately. If a field of research
is relatively unknown and only limited presumptions about the conditions exist, explorative
study designs are beneficial. In explorative study designs, predominantly qualitative methods
are used (Diekmann, 2007, pp. 33-34). Consequently, a qualitative analysis is employed to
generate insights into this relatively unexplored field of research.

The research sample consists of members of the Swiss industry association Chocosuisse and
represents the companies with the highest sales. Accordingly, alongside the global leaders Barry
Callebaut, Lindt & Sprüngli, Mondelēz International and Nestlé, the national leaders Chocolat
Frey and Chocolats Halba are taken into account. Other chocolate manufacturers are not
considered because of their small volume of annual sales. In order to identify the emerging
corporate responses and analyse their influence, data is collected by both primary research and
secondary research. On the one hand, publications concerning the corporate sustainability
efforts are analysed. In order to draw inferences, the content analysis of the publications is
conducted systematically and aims at objectivity (Diekmann, 2007, p. 577). Where available,
the most recent corporate sustainability reports and the respective corporate websites serve as
the principal source of information. In addition, newspaper articles and publications of
international organisations and NGOs are consulted. All publications are analysed according to
the same scheme that can be found in the Appendix. The extracted information from the content
analysis also serves as the basis for the expert interviews. On the other hand, expert interviews
with representatives of the chocolate companies are conducted. To complete the picture, experts
from certification organisations and NGOs are consulted as well. The list with all interview
partners can be found on page 61. Primarily, the expert interviews aim at receiving additional
information that is not contained in the publications. In particular, insights into the companies
supply chain and cocoa sourcing strategies are expected. Besides, the expert interviews are
intended to reveal current developments in global cocoa sourcing and the influence on the
sustainability challenges. With regards to expert interviews, guided interviews have been
proven appropriate (Meuser & Nagel, 2009, p. 472). Since expert knowledge is both explicit
and implicit, it cannot be inquired by a standardised questionnaire. Therefore, the interviews
are conducted on the basis of a semi-structured interview guide. A semi-structured interview
guide allows for covering all aspects of a topic and enables comparability of the experts’

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Cocoa Sourcing                                                                    Manuela Wettstein

responses (Diekmann, 2007, p. 537). The shared contextual and organisational affiliation of the
experts also contributes to the goal of comparability. Comparability is essential for identifying
similarities and differences, deriving supra-individual knowledge and generating generally
valid results (Meuser & Nagel, 2009, pp. 476-477). However, as a research instrument,
interviews have also drawbacks. Among others, sources of error are social desirability,
characteristics of the questions, the interview situation as well as personal characteristics of the
interviewer (Diekmann, 2007, p. 447). Furthermore, during evaluation, interpretation by the
researcher might be a source of bias (Diekmann, 2007, p. 545). In order to minimise possible
sources of error, all expert interviews follow the same semi-structured interview guide.
Although modified, the interviews with the representatives of the certification bodies and NGOs
technically follow the same interview guide. The semi-structured interview guide can be viewed
in the Appendix.

It is important to note that data is collected on the individual level. Hence, the collected data
needs to be consolidated in order to be able to draw inferences about collective global cocoa
souring. Therefore, the individual emerging corporate responses are compared to identify
similarities and differences. This comparison aims at detecting patterns so that statements about
the overall influence on global cocoa sourcing and on the sustainability challenges are possible.
Intentionally, the comparison does not provide an evaluation or a ranking of the individual
corporate responses.

    3. GLOBAL COCOA SOURCING
Cocoa is not only an ingredient in chocolate bars and pralines, but also in a variety of other
consumer products such as ice cream, biscuits, dairy products and spreads. While these products
are predominantly consumed in developed countries, cocoa is produced in developing
countries. Approximately 90% of global cocoa supply is produced by around six million
smallholders in Africa, Latin America and South East Asia (UNCTAD, 2008, p. 16). In the
following, first of all it is outlined how the raw material is transformed into consumer products.
Therefore, the processing and manufacturing chain is described. Second, the structure of the
upstream cocoa supply chain and the actors involved are described. Upstream is explicitly
mentioned to signal that the marketing of chocolate is excluded from the analysis of global
cocoa sourcing. Whereas the industry traditionally differentiates between upstream cocoa
processing and downstream chocolate manufacturing, these activities are subsumed in the
research at hand. Because the boundaries between several stages of the supply chain have
become increasingly blurred in recent years, this traditional differentiation would impede the
current analysis of global cocoa sourcing. Hence, upstream supply chain refers to the stages of
chocolate manufacturing, cocoa processing and cocoa production. Third, the functioning of the
conventional global cocoa procurement market is outlined. Therefore, the analytical framework
developed in Chapter 2.1 is employed. Finally, further essential industry stakeholders, which

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Cocoa Sourcing                                                                  Manuela Wettstein

play a crucial role in global cocoa sourcing, are described. By considering these four aspects of
global cocoa sourcing, a solid basis for analysing the influence of the emerging corporate
responses on global cocoa sourcing and on the sustainability challenges in cocoa production is
established.

    3.1 PROCESSING AND MANUFACTURING CHAIN
Cocoa beans are the seeds of the Theobroma cocoa tree that grows in tropical environments
around the equator and flowers in two cycles of six month. The seeds are enclosed in the cocoa
pod, which is the fruit of the cocoa tree. The ideal climate for cocoa is hot and rainy with lush
vegetation to provide shade for the cocoa tree (WCF, 2014a, p. 2). Consequently, regions
available for cocoa cultivation are limited. Except for regions in countries like Vietnam and
Papua New Guinea, untapped cocoa-growing areas are hard to find (Fold, 2004, p. 229).

In principle, the processing and manufacturing chain starts with the harvest of the cocoa pods.
Since the first processing steps, namely drying and fermenting, are generally done by the
farmers themselves, these activities are attributed to cocoa production. Cocoa processing refers
to activities needed to convert cocoa beans to semi-finished cocoa products such as cocoa
butter, liquor and powder. Chocolate manufacturing refers to further blending and processing
of these semi-finished products and mixing them with other ingredients to make chocolate. The
industry distinguishes between two segments: manufacturing industrial chocolate, called
couverture, and manufacturing consumer chocolate. Couverture is the basis for consumer
chocolate, but is also an ingredient in a variety of other consumer products that contain
chocolate (UNCTAD, 2008, p. 10). The processing and manufacturing chain is illustrated in
Figure 2 and described in detail in the following.

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Cocoa Sourcing                                                               Manuela Wettstein

                           Figure 2: Processing and Manufacturing Chain

                                     Source: UNCTAD, 2008

Cocoa Production
Typically, a cocoa farm in West Africa covers two to four hectares. While in West Africa a
hectare produces 300 to 400 kilogram of cocoa beans per year, a hectare in Asia produces
around 500 kilograms and in Latin America up to 600 kilograms (WCF, 2014a, p. 2). Normally,
harvesting of cocoa pods begins after three years of tree growth and maintenance (UNCTAD,
2008, p. 7). Peak production levels can be reached by the fifth year and can be continued for
about ten years (WCF, 2014a, p. 4). Basically, there are two farming systems for cocoa:
monocultures and mixed-crop. Mixed-crop systems are cultivations that combine cocoa with
other crops such as timber, avocado, orange or papaya (Chocolats Halba, 2014, p. 49). The
dominant system worldwide is the monoculture full sun system (Andres et al., 2014). While
monocultures yield revenue gains in the short-term, mixed-crop systems increase the farmers’
incomes in the long-term. On one side, farmers can sale the fruits of the other crops and thus
earn more. On the other side, mixed-crop systems are characterized by improved soil quality
and minimized pests and diseases, which in turn increases yield in the long run (Chocolats
Halba, 2014, p. 50). Thus, mixed-crop is considered a more sustainable system for cocoa

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Cocoa Sourcing                                                                      Manuela Wettstein

production (Andres et al., 2014). Cocoa is not only a delicate and sensitive crop, but also labour
intensive (Terazono, 2014). When harvesting, the farmers remove the cocoa pods from the trees
using long-handled steel tools and split it open with a machete or a sturdy stick. Afterwards,
the beans are cleaned, fermented and dried. Fermentation takes three to seven days and is the
crucial step that produces the chocolate flavour. After the beans are dried for several days, the
farmer sells them to local trade agents, buying stations or cooperatives (WCF, 2014a, p. 4).

Cocoa Processing
Roasting is commonly considered the first stage of cocoa processing. Cocoa beans can either
be roasted with the shell intact or de-shelled and crushed. The latter is referred to as nib roasting.
The nib is the inside of the cocoa bean. After roasting, the next major step is grinding. During
grinding the beans are milled until the so called cocoa liquor is created (UNCTAD, 2008, p. 7).
Cocoa liquor is either directly used as an ingredient of couverture or is further processed. When
further processed, cocoa liquor is fed into hydraulic presses that separates the liquor into cocoa
butter and cocoa powder (WCF, 2014a, p. 5).

Chocolate Manufacturing
In order to produce couverture, the semi-finished cocoa products are mixed with other
ingredients and thus poured into conches. Conches are large machines that stir and smooth the
mixture under heat. Conching can last from a few hours up to three days. The longer the mixture
is chonched, the smoother the couverture becomes. (WCF, 2014a, p. 5). Depending on the
recipe, around one-third of cocoa liquor is mixed with two-thirds of cocoa butter (P. Somlo,
personal communication, January 26, 2015). If the couverture is sold to third parties it can either
be delivered in liquid or solid form. Generally, it is delivered in liquid form to major chocolate
manufacturing companies and in solid form to smaller companies such as artisan chocolate
manufacturers, patissiers or bakeries. The couverture is used to produce the consumer chocolate
and thus even further processed before the chocolate is brought into shape (UNCTAD, 2008, p.
7).

    3.2 UPSTREAM SUPPLY CHAIN
The cocoa supply chain is considered significantly more complex than those of other
commodities (UNCTAD, 2008, p. 9). This is mainly due to the various intermediate processing
and manufacturing stages, each with traded outputs (UNCTAD, 2008, p. 10). There are discrete
markets for semi-finished cocoa products, such as cocoa butter, liquor, powder and couverture.
In the following, the structure of the upstream supply chain and the actors along the supply
chain are described. Therefore, discrete stages are delineated and recent developments are
outlined. However, demarcating discrete stages masks the multi-layered and complex structure
of the supply chain to a certain extent. Nevertheless, reducing complexity is necessary to
provide a clear picture of conventional global cocoa sourcing. While the supply chain map
shown in Figure 3 provides an overview of the ultimate upstream supply chain, the discrete

                                                 11
Cocoa Sourcing                                                                    Manuela Wettstein

stages are outlined in the following. Although the focus of the research at hand lies on Ghana,
Côte d’Ivoire and Switzerland respectively, also global aspects are taken into account in order
to support the overall understanding.

                                     Figure 3: Supply Chain Map

                        Source: Chart is based on inputs from UNCTAD (2008),
                       Chocolats Halba (2014) and Fair Labor Association (2012)

Farmers
While there are around six million cocoa farmers, it is estimated that approximately 40-50
million people depend on cocoa for their living (WCF, 2012). Depending on the size of the
farm, farmers work alone, employ workers or engage sharecroppers. Sometimes, farms reflect
so-called co-proprietary systems were farmers work in cooperation with other family members
and share land and income (Fair Labor Association [FLA], 2012, pp. 27-28). Larger farms or
smallholders that do not live close to their farm, engage sharecropper who look after their crop.
Normally, the sharecroppers receive a part of the cocoa harvest. Basically, there are two types
of cocoa workers: volunteers and regular hired workers. While hired works receive a salary,
volunteers usually receive benefits such as food and lodging, but not a salary (FLA, 2012, p.
29). The volunteers are mostly family members and friends who help with the harvest during

                                                 12
Cocoa Sourcing                                                                  Manuela Wettstein

high season. Family members are not considered as workers by the farmers. After harvesting,
fermenting and drying, the farmers sell their beans to local traders, buying stations or their
cooperatives. Since most farms are located in distant rural areas, farmers often face an
oligopsony or in some regions even a monopsony of purchasers (UNCTAD, 2008, p. 33).

Local Traders / Buying Stations
Due to the fact that many farmers live in remote rural areas with poor infrastructure, mostly
local trade agents collect the beans from different farms. In Côte d’Ivoire, these local trade
agents are called pisteurs. Pisteurs are engaged by larger local traders or cooperatives and are
paid in advance. Usually, they are contracted for a season. Pisteurs keep the difference between
what they pay to farmers and what they receive from their contractors as a salary. Mostly,
pisteurs have a defined region assigned to them where they buy cocoa beans (FLA, 2012, p.
27). Pisteurs transport the beans to larger villages where the contractors collect the beans.
Pisteurs are usually not registered and the supply chain is generally unsteady, because traders
sell and buy from anyone. Cocoa procurement mainly occurs through this “unorganized” sector
that involves many intermediaries. (FLA, 2012, p. 2). Overall, similar cocoa trading structures
exist in Ghana. There, the local trade agents are called purchasing clerks. Purchasing clerks are
agents of the licenced buying companies (LBCs). Mostly, the LBCs are privately owned
companies. However, also cooperatives may hold a licence. Among these LBCs are local as
well as international cocoa traders and processors (World Bank, 2013, pp. 10-12). Local trade
agents not only buy cocoa from the farmers, but also provide the farmers with services. Among
others, agents provide technical assistance and information on cocoa, offer loans to pay school
fees, farm maintenance or emergencies, and put their private vehicles to the disposal of the
entire farming community (Baah et al., 2012, p. 46). However, there are reasoned suspicion that
the agents adjust weighting scales, under record bean weight and do not pay bonuses to the
farmers (Baah et al., 2012, p. 45). The large local traders do not only buy cocoa beans from
pisteurs or purchasing clerks, but also from cooperatives or directly from farmers that are more
accessible. Depending on their size, they also operate buying stations (FLA, 2012, p. 26).
Altogether, it can be stated that the local cocoa trade is rather untransparent and may involve
many intermediaries. This makes overall supply chain transparency, monitoring and
remediation efforts challenging for chocolate companies (FLA, 2012, p. 2).

Cooperatives
Besides selling cocoa to local traders, farmers can also sell their beans to cooperatives.
However, this option is only available to farmers that are member of a cooperative. In recent
years, the formation of cooperatives has been promoted in the context of sustainability
initiatives (P. Heid & K. Brugger, personal communication, January 22, 2015). Since
cooperatives buy directly from their farmers, a possibly long chain of local traders is
circumvented. Depending on the size and market position, cooperatives sell to larger local
traders, exporters, international traders, cocoa processor or even directly to chocolate

                                               13
Cocoa Sourcing                                                                   Manuela Wettstein

manufacturers in consuming countries (P. Heid & K. Brugger, personal communication,
January 22, 2015). It is important to note that cooperatives are not necessarily part of a
sustainability programme. In the past, cooperatives were not popular among farmers because
they often dissolved again and by that farmers lost money. However, as part of the boom of the
sustainability initiatives cooperatives became more attractive, especially because in this context
cooperatives pay price premiums, provide trainings and other economic and social benefits (D.
High, personal communication, February 13, 2015).

Exporters
At the turn of the millennium, liberalisation processes in several producing countries resulted
in increased horizontal market concentration of cocoa exporters. Simultaneously, international
trading companies have taken over exporting operations in producing countries (UNCTAD,
2008, p. 22). By now, the largest local exporting companies are either subsidiaries or closely
associated with international cocoa traders. Some international traders have also set up their
own purchasing logistics in producing countries and purchase directly from farmers at or close
to the farm gate (UNCTAD, 2008, p. 19). Two factors are considered drivers of these processes.
The first factor is access to finance. With the liberalization processes, banks became reluctant
to finance local operators due to credit risks. International traders on the other hand enjoyed
strong credit ratings and received funds from institutional investors. The second factor is
economies of scale in the logistics of cocoa overseas transportation (UNCTAD, 2008, p. 20).
In Ghana, however, cocoa is exported by the state-run Ghana Cocoa Board (COCOBOD)
(World Bank, 2013, p. 11). The COCOBOD is further outlined in chapter 3.4.

International Traders
The international cocoa trading market changed considerably during the nineties. Companies
with a diversified range of trading interests, such as Cargill and Archer Daniels Midland
(ADM), expanded into cocoa trading and displaced previously leading firms. The expanding
companies were successful because they transferred logistics knowledge about overseas
transportation gained with other commodities to cocoa logistics. Most significantly, they
introduced bulk shipment to the cocoa industry, which means that cocoa beans are either loaded
into shipping containers or directly into the ship’s hold (UNCTAD, 2008, p. 21). Previously,
cocoa was shipped in jute bags. Compared to shipment in jute bags, bulk shipment is up to one-
third cheaper (UNCTAD, 2008, p. 20). Consequently, cocoa overseas transportation evolved
towards bulk shipment. At the destination port, cocoa beans are stored in pier warehouses until
requested by the processors or manufacturers (WCF, 2014a, p. 4). Overall, only eight traders
and processors account for about 75% of the global cocoa trade (Fountain & Hütz-Adams, 2015,
p. 7).

                                               14
Cocoa Sourcing                                                                   Manuela Wettstein

Cocoa Processors
In recent years, the boundaries between international trading and processing companies blurred.
On the one hand, international trading companies integrated backward up to the farmer’s level
and forward into cocoa processing. On the other hand, processing companies integrated
backward to cocoa trading and export. Fundamentally, market concentration at the cocoa
processing stage is high (UNCTAD, 2008, p. 23). Only a few companies remain that sell semi-
finished products. Both, economies of scale and scope, are considered drivers of these
developments. Especially the need to gain scale in order to operate cost-efficiently is seen as a
major factor because cocoa processing is capital intensive. Processing facilities are expensive,
require a large tonnage throughput and need to operate on a continuous basis (UNCTAD, 2008,
p. 24). Moreover, the processing stage consolidated over time because many major chocolate
manufacturers withdrew from the less profitable grinding operations (UNCTAD, 2008, p. 22).
For example, Nestlé outsourced its cocoa processing to Barry Callebaut in 2007. As part of the
deal, several production facilities were transferred to Barry Callebaut (Nestlé, 2007). Recently,
the processing stages was also a venue for major mergers and acquisitions. For example, in
2013, Barry Callebaut bought the cocoa ingredients division from Petra Foods. The acquisition
made Barry Callebaut the world’s largest cocoa processor and chocolate manufacturer (Barry
Callebaut, 2013). In December 2014, ADM announced to sell its cocoa processing business to
Olam in order to refocus on higher-margin businesses. This deal will lift Olam to the top-three
cocoa processors globally if it receives regulatory approvals (Bunge, 2014). Traditionally,
production facilities for cocoa processing and chocolate manufacturing are located in the
consuming countries. However, companies increasingly establish grinding facilities in
producing countries. Basically, there are two reasons for that. First, operations are cheaper than
in Europe or North America. Second, through grinding the initial volume of cocoa decreases
by almost 20%. Consequently, more cocoa can be shipped in one load and thus cost efficiency
increases (P. Somlo, personal communication, January 26, 2015).

Couverture Manufacturers
The boundaries between cocoa processors and couverture manufacturers blurred in recent years
as well. To illustrate this, the top four ranking trading and processing companies – Barry
Callebaut, Cargill, ADM, and Bloomer – that account for almost half of the world’s cocoa
grinding, also supply about three-quarters of worldwide couverture (UNCTAD, 2008, p. 26).
Since Cargill recently agreed to buy ADM’s global chocolate business, concentration also
increases further on the couverture manufacturing stage (Bunge & Josephs, 2014). It is expected
that the two companies Barry Callebaut and Cargill will produce about 70-80% of the world’s
couverture if Cargill’s acquisition of ADM’s chocolate business is approved.

Consumer Chocolate Manufacturers
Due to the proportions necessary to make chocolate, chocolate manufacturers need to purchase
extra cocoa butter in addition to cocoa beans (P. Heid & K. Brugger, personal communication,

                                               15
Cocoa Sourcing                                                                    Manuela Wettstein

January 22, 2015). While some chocolate manufacturers process cocoa beans, others purchase
both cocoa butter and cocoa liquor. Still others buy couverture only. Over the course, the
consumer chocolate manufacturing market gradually consolidated as well. However, consumer
chocolate manufacturers vary greatly in terms of size and business interests (UNCTAD, 2008,
p. 29). In local consumer markets, multinational chocolate manufacturers compete with small
and medium sized chocolate manufacturers. Nevertheless, multinational chocolate
manufacturers clearly dominate the market. To illustrate this, the top three chocolate
manufacturers, Mondelēz International, Mars and Nestlé, account for nearly half of global
market shares in 2013 (Market Line Industry Profile, 2014). Concentration took place mainly
due to mergers and acquisitions of smaller companies with strong local brands in national
markets (UNCTAD, 2008, p. 30).

    3.3 COCOA PROCUREMENT MARKET
After having described the structure of the upstream cocoa supply chain and the actors involved,
the functioning of the conventional global cocoa procurement market is outlined. Therefore,
the analytical framework developed in chapter 2.1 is employed.

Basically, cocoa is a commodity without many differentiation factors. However, there are two
basic varieties with different qualities. Criollo, called flavour cocoa, accounts for less than 10%
of global harvest and is largely grown in Ecuador and Venezuela. The beans are rich in flavour
and only used for high quality chocolate. In West Africa, solely Forastero beans are cultivated.
Although Forastero is commonly considered the standard quality, there are different qualities
of Forastero beans depending on the region of origin, the fermentation and drying processes
(Chocosuisse, 2001, p. 22). In recent years, also a hybrid variety, called Trinitario, came into
the market. In terms Kraljic’s (1983) PPM, cocoa beans are a rather uniform as an item. Recall
that, according to the PPM, two factors determine the sourcing strategy of a company: the profit
impact and the complexity of the supply market in terms of supply risk of an input item. For
chocolate manufacturers, cocoa is undoubtedly the ingredient with the highest profit impact. So
far, the actual supply of cocoa has not been of concern. Over the years, there has been a tight
relationship between supply and demand (ICCO, 2014b). As a consequence, cocoa can be
considered a leverage input item. As a reminder, leverage items should be sourced based on
price. Furthermore, when dealing with leverage items, a company should fully exploit its
purchasing power and mainly buy on the spot (Kraljic, 1983, p. 112). Especially the conducted
expert interviews revealed that cocoa is indeed sourced on a transaction-based manner. The
lowest price is what matters in conventional cocoa sourcing (D. High, personal communication,
February 13, 2015).

The global market price is determined at the futures markets in London and New York (ICCO,
2012b). The resulting prices provide reference prices for virtually all cocoa traded worldwide
(Gilbert., 2008, p. 10). The global market price consists of the futures market price, a

                                                16
Cocoa Sourcing                                                                  Manuela Wettstein

differential, which is either a mark-up or a discount, and a certification premium in case of
certified-cocoa beans (A. Gubser, personal communication, April 8, 2015). Cocoa prices are
highly volatile. The price is affected by many external factors such as weather conditions, cocoa
pests and diseases, political instability or speculation (Goodyear, 2014). Broadly, there are two
groups of futures market participants: commercial and non-commercial traders. Commercial
traders are participants of the physical cocoa supply chain. Commercial traders do not use cocoa
futures contracts to secure the physical supply of cocoa beans, but to offset the risk of adverse
price movements. Non-commercial traders do not supply or demand cocoa, but trade at the
cocoa futures markets in order to make a profit on price changes (ICCO, 2012b). An overview
of the monthly cocoa bean price developments since 1985 can be viewed in Figure 4. During
the last 30 years, the lowest price was US$ 860.74 per tonne in February 2000. The highest
monthly cocoa price was US$ 3522.10 per tonne in January 2010. The high price volatility of
cocoa is clearly shown in Figure 4.

                           Figure 4: Development of the Cocoa Bean Price

                                    Source: Index Mundi, 2015

The global market price is the dominant factor that influences the price the farmers receive for
their beans. Generally, the average farm-gate price correlates fairly well with the global market
price (ICCO, 2014f, p. 5). Between 1993/1994 and 2006/07, the average farm-gate price in
Ghana was around 54% of the global market price and around 47% in Côte d’Ivoire (Oxfam
International, 2008, p. 13). Besides market factors, also government policies in the producing
countries influence the farm-gate price (Oxfam International, 2008, p. 12). The farm-gate price
is a residual from the global market price when subtracting costs and margins of international
traders, exporters, local traders, as well as governmental taxes and fees. Hence, cocoa farmers
can be considered price takers (Gilbert., 2008, p. 14). Even when global market prices are high,
the farm-gate price does not guarantee a decent income for the farmers (Oxfam International,
                                                17
Cocoa Sourcing                                                                  Manuela Wettstein

2008). To illustrate this, a very basic sample calculation is provided. As a reminder, farmers in
West Africa produce around 300 to 400kg of cocoa beans per year. Thus, when taking into
account the highest price of US$ 3522.10 per tonne, a Ghanaian farmer selling 350kg, receives
an annual income of US$ 665. This results in 1.8 US$ per day. When taking into account the
lowest price of US$ 860.74, the same farmer receives US$ 162 per year, resulting in US$ 0.44
per day. Taking into account the lowest price, a farmer in Côte d’Ivoire, who sells 350kg,
receives US$ 142 per year. This results in US$ 0.39 per day. Overall, it has to be stated that
cocoa farmers gain very little from an overall profitable global cocoa trade (Fairtrade
Foundation, 2015a).

In particular the expert interviews revealed that in conventional cocoa sourcing, companies do
not engage in multi-tier supply chain management. In terms of Tachizawa & Wong (2014),
companies in conventional global cocoa sourcing largely follow the “don’t bother” approach.
Chocolate companies focus on their tier-1 suppliers and do not have information about sub-
suppliers. Supply chain transparency is virtually absent. In this context, supply chain
transparency means that a focal firm not only knows its basic or extended supply chain, but its
ultimate supply chain.

    3.4 INDUSTRY STAKEHOLDERS
Besides the actors involved in the cocoa supply chain, there are further essential industry
stakeholders that play a crucial role in global cocoa sourcing. In the following, these
stakeholders are described in order to arrive at a complete picture of conventional global cocoa
sourcing.

Cocoa Boards
In both countries, Ghana and Côte d’Ivoire, state-run cocoa marketing boards exist. While in
Ghana, the cocoa supply chain combines elements of privatization with strong governmental
presence, the cocoa sector in Côte d’Ivoire is almost fully liberalised (World Bank, 2013, p.
10). In Ghana, the COCOBOD oversees nearly all aspect of the cocoa supply chain (World
Bank, 2013, p. 1). Besides cocoa export, the COCOBOD is responsible for cocoa quality
controls, pest and disease controls as well as the distribution of planting and other input
materials such as subsidized fertilizers and tools. The COCOBOD issues the licences to the
LBCs. The LBCs are required to collect the beans, pay the farmers a guaranteed floor price,
conduct certain quality controls and sell the beans at a fixed price to the COCOBOD for export.
In return, the COCOBOD retains a share of the world cocoa price. In principle, farmers as well
as cocoa traders and processors operate relatively well within the COCOBOD framework
(World Bank, 2013, p. 1). Nevertheless, the COCOBOD is also criticized for being inefficient
and bureaucratic (A. Hüsser, personal communication, January 29, 2015). In contrast to Ghana,
the government of Côte d’Ivoire ceded control over the cocoa sector as a consequence of market
liberalisation. The process was triggered by the World Bank and the International Monetary

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